Pink Sheets

The spot price of uranium jumped to $60.25 this week from $56 last week due to the Cigar Lake mine flood. And for some reason, it took a week for Strathmore Minerals (chart, combined links) to catch up to the rest of the uranium stocks, but today it did so with a vengence on the 2nd highest volume day ever as far as I can tell.

I've been reading StockInterview.com, which has a lot of stuff on uranium here. I highly recommend it, although keep in mind that they're generally focused on a specific perspective within the industry. You'll see the same people quoted all over the place. But those are top people in the industry. You can easily spend 10+ hours going through what they have on uranium. The key things I take from what I've read there are 1) the details of the Cigar Lake mine make it clear that a flooding accident (there were at least two) was not surprising, 2) there's a strong perception that the uranium buyers were/are largely in denial about the changing market conditions and the supply risks in the uranium market, 3) things are complicated.

Cameco announced on Monday Oct 23 that they experienced a flood in the developing Cigar Lake mine.

Cameco Corporation reported today that Cigar Lake mine construction is expected to be delayed by at least a year after the mine experienced a significant water inflow following a rock fall and a portion of the underground development was allowed to fill with water. Production startup was previously planned for early 2008.

This mine was projected to ramp up to 18 million pounds of uranium oxide per year, which would make it either the largest or 2nd largest uranium producing mine in the world. That amount of uranium would have been around 12% of the total world production (some are claiming 17%).

Later on, Cameco announced that they could not contain the water, which will now flood the entire mine.

Efforts to protect the main shaft and key underground infrastructure by closing bulkhead doors were not successful. Everyone was safely evacuated by 11:30 a.m. today. There were no injuries and no impact on the environment.

The flood is the reason why Strathmore Minerals and other uranium stocks have gone up so much this week. Supply was already very limited going forward and it now looks like the Cigar Lake mine uranium will be pushed out by perhaps 3 years.

TheStreet.com has a guest column here by Sean Brodrick, an editor at Weiss Research about the flood which covers a lot of the various aspects of the industry.

Nigel Wilson at The Australian says:

The accident has led market analysts to suggest that the spot price, which was $US56 a pound this week, could top $US100 a pound as consumers attempt to find replacement supplies for post-2008 consumption.

The Globe and Mail has an article with some quotes from Sprott Asset Management:

Kevin Bambrough, market strategist at Sprott Asset Management Inc. of Toronto, said yesterday that he now thinks there is a "good chance we'll see $75 by year end and be testing the $100 level next year."

Mr. Bambrough said mining executives he talked to are estimating Cigar Lake's start-up could be delayed three years or more because of the flooding and that it may not be able to extract the amount of uranium it had anticipated.

And the other side of the argument is this:

By contrast, John Redstone at Desjardins Securities in Montreal has a decidedly bearish view on prices for the metal.

He said in a note to clients following Cameco's announcement Monday that "any production shortfall from Cigar Lake can be easily met by the 20,000-25,000 tonnes of inventory that the World Nuclear Association estimates the industry has on hand."

As a result, he said, he expects the spot price to stay in a range of $55 to $65 a pound and, with other new production set to come on stream, fall to $45 in 2008 and $35 in 2009.

If that's the case, why is the spot price so high right now when investors were only responsible for 8 million of the 23 million pounds of yellowcake (in 85 transactions) so far this year on the spot market? Yes, that's a lot but the price has been truly soaring these last two years from $15.

I believe that higher prices will definitely pull a lot of supply into the market, but the imbalance between supply and demand is huge and it just got worse.

Mining MX has an article on the flood here. They talk about Uranium One (which I covered here). Uranium One is not able to speed up their processes because they're already going as fast as possible. And I found this to be very interesting:

The contracts are generally setting the received price as that of the spot price on the day of delivery because of the very tight conditions in the uranium market, he [CFO Jean Nortier] said.

Nortier estimated the shortfall in the market of between 60m and 80m pounds.

“The market has been operating under the “everything has to go right” scenario and now things aren’t going right,” he said. “There are quite a number of healthy assumptions being made by the market on the supply side. We believe it continues to operate on that scenario and there might be more of these shocks coming.”

Workers have gone on a wage strike at Rio Tinto’s Rossing uranium mine in Namibia, which is the source of nearly eight percent of the world’s nuclear fuel, Bloomberg reported on Tuesday.

I found this at InvestorIdeas.com. Kevin Bambrough of Sprott Asset Management has some quotes in there.

U.S. utilities should panic. Less than one month ago, we challenged Rajiv Kundalkar, Vice President of Nuclear Engineering for Florida Power and Light, about Cigar Lake and other significant uranium supply sources at a Platts-sponsored nuclear fuel conference. We asked him if he was aware of the risks at Cigar Lake and else where. Calmly, he answered that he was.

Obviously, Mr. Kundalkar was not.... Those who neglected to lock up uranium inventory for their reactors through 2011 are now the butt of jokes at the Nuclear Energy Institute's (NEI) annual uranium conference presently in session in Quebec City, Canada [probably at the Chateau Frontenac]. Many fuel brokers and utility industry consultants emailed or phoned us, over the past six months, announcing they were convinced the uranium price was "too high." Each one sincerely believed Cigar Lake, Kazakhstan and/or Olympic Dam would bring the uranium price back down to earth.

"I still say the uranium price is going to test and exceed the inflation-adjustment highs of the prior peak," Bambrough told us. "I think the (peak of) $110 to $120 will get taken out in this market." Is this the super spike we've been waiting for, and will it sustain at higher levels? "We'll have to see how high the spike goes," Bambrough pondered. "I still think some companies are going to be able to sign long-term deals around $100/pound. I don't think that will be a problem for some to have that opportunity."

Bambrough mentions that Cigar Lake will be a huge problem because Cameco will need to deal with water permits to handle the increased flow rate.

"Right now, they're only permitted to process about 500 cubic meters of water an hour," he pointed out. Cameco Chief Executive Jerry Grandey told analysts on Monday the water was flowing at 1500 cubic meters an hour. "Basically, they've got to go and apply for permitting to get processing in place to handle that extra water flow," Bambrough said. "We don't know what the flow rate is ultimately going to be. They don't even know how contaminated the water is going to be and what processing needs to be done. They've got a big water problem to deal with."

Then there's Kazakhstan where Russia has locked up the uranium there "a couple of weeks ago" for their own facilities. As far as an Olympic Dam expansion goes, apparently it needs a desalination plant since they already use up all the local water, which requires a power plant.

Read the whole article, it's very interesting. More here.

The Star Phoenix has a good article on the flood.

Some Cameco mine officials have likened mining Cigar Lake and the similar geology surrounding the McArthur River uranium deposits as akin to poking holes in a submarine while submerged. The analogy is apt, since the water in the sandstone geology -- at a depth of 500 or 600 metres -- is under the same pressure as ocean water at the same depth.

It's worth noting that Strathmore Minerals has been working hard to get properties that are amenable to in situ leaching, which is cheap, easy, and environmentally friendly.

As far as Cameco's contractual obligations go, they have the provision for a force majeur.

A ‘force majeure’ is a clause in a commercial contract covering natural disasters, such as a flood, excusing the party from performing its obligations under the contract. “A lot of the forces majeures are probably going to the U.S,” he said. “The utilities were confident in the 18 million pounds to be coming out of Cigar Lake. They aren’t going to get this uranium. The question is: ‘Where are they going to get it?’”

It wouldn't surprise me if the uranium spot price went up even faster than it has in the past (but it won't show up for at least a week since the price is delayed). And the issues about things going wrong makes a lot of sense. Companies are going flat-out right now in trying to bring uranium to the market. Utilities would be silly to try to discourage speculation in the prices by investors because the price is what sends the signals to the producers to increase production. Driving the price up quickly before there's a crisis is the best way to prevent a crisis. The cost of uranium is a small part of the cost of running a reactor. Higher prices won't affect them that much, but it will affect producers. At $100 per pound, you'd see some serious motivation and resources put into it.

Previous Results:
5/28/2006 Checking back with Mr. Market: 1
BFTC, LIAL, LCLG, BRSI, BSOG, BAYN, RCBK, CNB, CFNA, WTFC, Pacific International Bank, BGII, BLYM, AMEN, BVBC, BNSIA, BOGN, BONL, BAWC, BWTL, BPTR, BDLF, BLLD, BURCA, LVWD, BKBO, BOJF, SCCB

5/29/2006 Checking back with Mr. Market: 2
BUKS, XAIN, YIWA, SHFK, SODI, YHGG

10/13/2006 Results 1
BFTC, BKBO, LVWD, LCLG, BRSI, BSPA, BSOG, BOJF, BAYN (Oops, I already did these!)

New Results:
ADY (stock sec)
I had viewed this as a potentially good investment, but I had a problem with the CEO's controlling interest. The stock price has been increasing.

Their latest quarter 10-Q is here. Period ending June 30, 2006. 15 million shares. 2.4 million warrants. I had assumed 25 million totally diluted (seems way high, why?). Balance sheet looks fine. Revenues are way up. Gross profit has nearly doubled. No income tax. Earned $10 million for the first half. Cash flow from operations is very low due to deferred income. Capex is high (not too surprising, new construction projects). Some net borrowing. Big advertising costs, but they're coming down. Overall sales quantity increased 53% quarter-over-quarter. ASP increased 13% from prior year. Boy, I'm regretting not investing in this company.

I looked at the 10-K here.

ADY raised $18.2 million by issuing [apparently non-toxic] convertible notes (convert at $14.50 per share, also warrants for 251K shares at $14.50). Details. Seems like the totally diluted share could might be closer to 20 million shares. But I'd need to look closer before ever investing in it.

Current stock price is around $14. It was a bit lower when I looked at the 10-K. It was embarrassingly cheap when I looked at it August, 1 2005 and in July and here. With these Chinese reverse mergers, it's so important to try to err on the side of caution rather than risk taking. That's what I did, so I can't give myself a flunking grade here.
Grade: C

BABB (stock, sec)
Stock is mostly unchanged at around a dollar, which is about what I figured it was worth. 10-Q for Aug 31, 2006. They're down to 1 company owned store (from 4) and 140 franchisees (from 178). Net income is up to $236K for the quarter (from $147K prior year). Revenues are way down and have been declining for two years (at least based on Q3).
Stop following
Grade: A

BACL (now BBAL sec)
First looked at it here. Stock is down to 25 cents from around a dollar.
Grade: B

CACC (stock, sec)
First looked at it here. Same business as NICK. Stock was selling for $13 and free cash flow seemed like $1 per share (earnings more like 60 cents). I didn't really like the business model. The stock is now above $33.

The company addressed some issues a shareholder had about a Dutch auction where they bought 20.6 million shares at $28 to $31.50. The Chairman sold 3.3 million shares. It's weird that they paid for it using the revolver. 30 million shares outstanding afterward.

The most recently filed 10-Q for the period ending June 30, 2006. Revenues up about 10%. Expenses up about 20%. Operating income only up about 2%. Diluted 50 cents per share vs 44 cents. That's for the quarter. Apparently, I was way off in terms of earnings.

Investment cash flow contains huge amounts from principal collected on loans and advances to dealers (and accelerated payments of dealer holdback). There are huge cash flows that could potentially have anything in them (as far as I can tell). Pretty much all of the cash which arrives from customer payments goes back out to new loans. Write-offs and recoveries are fairly low. Allowance and provisions seem fairly solid. They have a good amount of data on spreads per year that loans are originated. Spreads are similar to NICK in the mid twenties percentage range.

I recall that CACC directly finances car loans and sends an advance and the down payment to the dealers. The customer loan payments go to pay the advance at first. Then 80% of the rest of the payments go to the dealer and 20% goes to CACC (plus there are some fees and stuff that adds to the 20%). Dealers have to pay around $10K to join the CACC program. Each loan has a sort of capital structure where CACC is at the top of the stack and the dealers are at the bottom (to presumably keep dealers from submitting garbage loans). However, this is after CACC has already paid the dealer an advance.

I looked at more details here and concluded that business was likely to deteriorate due to competition. CACC had all sorts of accounting troubles and things looked bad when I looked at them last year.

I had asked in bold font, "Why is this stock still trading at $13.50?!?! These people have no fear." I concluded that it was a good company, their collection forecasts were accurate, the accounting was royally messed up. And they were in violation of covenants.

I was expecting some sort of interest rate hell in the future and it never happened. The company cleaned up the mess and the stock went up to $33. I was really wrong about this one and I think the root cause of being wrong was not putting enough weight on my view of the company and the overall business model (which I had learned about from NICK).
Grade: D (not an F because those problems were very real and I erred on the side of caution)

This post is intended to answer a question in the comments section in my last post about Epolin (EPLN) here.

First off, at this point, the present value of future free cash flow is so well established as a method for determining the value of a security that I don't think I need to explain why. If you don't know what net present value is or how to compute it or if you disagree about that being the basis for valuation, then that's a totally different issue.

Below is a chart of three cash flows, with the x-axis being time.


If you were to rely on the immediate P/E ratio alone, A and C would have roughly the same value while B would have a higher value. If you were to rely very heavily on the rate of growth in free cash in the recent past and near future, then you'd say that A was the most valuable, followed by C and then B. In reality, we should be figuring out the area under the curve, discounting by increasing amounts the further we look forward in time (not that I'm actually going to sit down and do the integral).

Now I know that I very often just slap a P/E ratio on free cash flow streams (and often I just use earnings, when I believe that's a reasonable measure of free cash flow), but in every case [hopefully], I'm always considering what I know about the future of that free cash flow stream. Very often, I really don't know and I assume something a bit like B above and slap a P/E of 15 onto it and use that as the value.

Sometimes I believe that a business model is such that the current free cash flow is in danger. It could be due to future competition and a lack of any sort of moat. It could be due to big changes in the future or even just big uncertainties in the future. Technology companies usually deal with short lived cash flow streams like A and they constantly need to create new cash flow streams with new products. But in reality, nearly all cash flow streams look like A over a long enough time period. For a business to survive for any length of time, it needs to find new sources of free cash flow to replace ones which are declining.

One point I've tried to make on various message boards (mostly TMF Berkshire) is that your valuation of these three cash streams will differ depending on what discount rate you use. An unusually high discount rate will make near-term cash seem much more desirable than cash farther out in time. It will distort your perception of value. Likewise, an unusually low discount rate will make cash in the distant future look better than it really is. With a 15% discount rate, you have no patience. With a 2% discount rate, you'll ignore cash today in favor of cash too far into the future.

So anyway, my reason for considering the value of EPLN to be around a dollar is due to my sense of what the future free cash flow looks like. I see it more like C than B above. But I could be wrong. For me, EPLN is a fairly small investment and if I had more companies like ETLT, CXTI, and STHJF then I probably wouldn't be invested in EPLN.

ETLT announced here the results of the shareholder meeting.

because the company has been so successful in the transfer of embryo's in the PRC, that the business is now declining as numerous farmers are using their own stock (which had previously been implanted with foreign embryos) for breeding purposes. Accordingly, the demand for embryo transfers and the pricing is declining. As a result, the company is seeking new opportunities in its agricultural division.

The market is now reacting to the loss of the primary business, which makes a lot of sense. If the embryo business goes away, the company becomes nothing but E-Sea, a bunch of cash, and some people looking for acquisitions. However, you've got E-Sea's original business producing about 2.5 cents per share. You've got E-Sea's new business which will produce maybe another 2.5 cents per share (that was my assumption back in Feb). Then if the $40 million in cash can be invested to produce 5% per year, that adds another 5 cents per share for a total of 10 cents per share.

This shows why having a large margin of safety is so important in investments like this. ETLT doesn't need to hit a home run with investments in a new business in China.

CONCLUSION:
I continue to own the stock. If anything, this clears up a big red flag in my mind about their various announcements of potential investments outside the primary line of business (crouching tortoise, hidden mango). And when it became clear later that these things were just under consideration and not done deals, that also made it easier to deal with. Someone on the Raging Bulls message board was apparently at the shareholder meeting and said good things that match what I would have expected.

UPDATE Oct 18, 2006:
Here's more of my opinions.
The value of ETLT has changed, but it's not as bad as it looks. The cash flow stream from the embryo business is now worse than it appeared before. Right now, here's the business:

1) Declining embryo business with decreasing revenues and margins which will more or less end in about a year or two. Maybe it's worth 10 to 20 cents per share at this point based on how much [time discounted] free cash it will deliver going forward. But that value is totally dependent on management's ability to re-invest (see #3).

2) Expanding E-Sea business which will probably deliver a good free cash stream going forward, starting with around 2.5 cents per share per year and going up to perhaps 5 cents. That's probably worth around 40 cents at a minimum.

3) Whatever kind of return management will get from around $45 million or so in cash. This is not the same thing as valuing the cash itself since it's almost certain to be invested by management and shareholders will own the returns on the investments. This part of the business is better than a venture capital situation since they plan to acquire a functional business rather than starting one up. But it's still far from a sure thing.

Item #2 is huge because it puts a fairly solid floor on the value of the stock. For item #3, shareholders must evaluate management's ability to invest in new businesses and run them effectively. Right now the market is assuming the return from the investments will be terrible. It's treating each dollar's worth of cash in the hands of management as being worth about ten cents. So far, it seems that E-Sea was an outstanding investment. We've also seen management turn down potential investments based on projecting a lower than desirable return. As I've said before, they don't need to hit a home run with future investments. To beat the market's expectations, they simply need to destroy less than say 90% of the value of the cash they're holding. The bar is pretty low right now.

Epolin released their Q2 results today. Overall: top line is up 10%, bottom line is the same.

10-Q:
Period ending Aug 31, 2006.
12 million shares on Oct 1, 2006. 421K options outstanding (40 cent strike).

27% of sales were to 2 customers
40% of sales were to 4 customers.

Quarter vs prior year:
Reveues up 10.6% (due to increase in newer product areas)
Gross profit down 1.1%
Gross margin down to 54.5% from 60.9% (material cost increase of $127 for 6 months, factory overhead increase of $60K for 6 months, lower mix)
SG&A up 4.4% (salaries and benefits, health insurance)
Operating income down 2.6%
Tax down 9.1%
Net income up 1.8%

Net income in the future will be dependent upon our ability to increase revenues faster than increases, if any, in our selling, general and administrative expenses, research and development expenses and other expenses. Although we achieved an increase of $821,000 in sales for fiscal 2006 compared to fiscal 2005, and an increase of $379,000 in sales for the six months of fiscal 2007 compared to the six months of fiscal 2006, we have also incurred, in dollars, greater cost of sales and selling, general and administrative expenses in these periods. Certain of these expenses are due to costs and expenses related to a greater emphasis being placed on marketing, sales and technical service. This meant hiring new staff, consultants, continuing efforts to upgrade our facility and developing a new web site. We are encouraged, however, by the growth in our overall sales in fiscal 2006 which growth has continued into fiscal 2007.

31K shares issued from stock options.

Accounting review by Weismann Associates.

Net cash of $1.2 million (10 cents per share). This is up from around $800K last year.
AR is up somewhat, inventories are down somewhat.
Additions to building/improvements and lab equipment.

Quarter net income: $121K (vs $118K last year)
6 month net income: $346K (vs $257K last year)

Cash flow from ops for 6 months: $441K
Capex for 6 months: $48K (vs depreciation of $29K).
Nothing really in financing except the dividends of $235K

$12.7K regulatory costs for 6 months (about the same as last year).
Advertising costs of $7K (vs $12K last year).
5K shares repurchased.
421K stock options outstanding (none granted in 2006). Most have 4-7 year period remaining.

Revenue in Europe is down somewhat.

CONCLUSION:
Not terrible, but I expected better. I figure the business is worth around $1.00, but probably more than that. I expect them to scale well with the global economy growth.

Hydromer Inc (HYDI, sec, website) Bio-polymer (polymers for medical, commercial, cosmetics, and veterinary) research and development. Until 1982 controlled by current Chairman and CEO (71). From the newly released 10-K:

These polymers become extremely lubricious (slippery) when wet. Techniques have been developed for grafting or applying this substance onto a broad variety of materials, including other polymers like polyurethane, polyvinyl chloride, and silicone elastomers, ceramics and metals. The Company has also been issued patents for permanent anti-fog materials, hydrophilic polyurethane foams, hydrophilic polyurethane blends, hydrophilic polyvinylbutyral alloys, several biocompatible hydrogels and an anti-bacterial medical material.

They have products from boat hull coatings to cow teat coatings.

10-K: (Why did they just issue a 10-K for the same period, neither is an amended version)
period ending June 30, 2006.
4.6 million shares on Sept 1, 2006. 402K options.
Customer concentration: 32% and 29% of revenues for J&J's Cordis Division and Cook Endoscopy (formerly Wilson Cook Medical).
85 employees.
Bought a building at 35 Industrial Parkway, Branchburg, NJ in 1998.

Product revenues down 3.4%.
License royalties down 18.4%.
Medical device orders were down. Contract coating services, medical coating sales were up. Lost two significant customers: one went in-house, the other "lost focus on the product line during the transition" [sounds like pure hogwash]

The Company expects a turn around from these particular customers, as in the former, the Company will replace lost medical device revenues with the sales of lubricious coatings (along with a cost reduction to staffing from the elimination of a product line). With regards to the second customer, the Company has brought to their attention of the business reduction and we are currently working on re-establishing volume. In addition, there was an one-time $250,000 in technology transfer revenues in fiscal 2005.

Gross margins went down. Looking ahead at the numbers, this doesn't seem like a particularly profitable business. More of a mousetrap company.

CEO has been around just about forever. Executive VP of operations was picked up in an acquisition in 2000 (he changed the focus to contract medical coatings). A lot of the top people are new, from 2000.

Two product liability lawsuits, covered by the liability insurance. No mention of the amount, which I would assume could affect liability costs in the future.

They claim that a lot of the increased costs now will help with operational leverage in the future. Also, 2005 costs were lowered by a $94K grant and low inventory overhead. Also patent infringement claim costs of $83K in 2006. ALso a $75K debt writeoff in 2006. $509K in legal fees since 2004, the case has now been settled (apparently in their favor since they claim it substantiated the validity of their patents). $238K impairment of goodwill recorded for 2006 (with no help in taxes), no charge in 2005. This was partially offset by $284K discounted value on $300K settlement showing up in 2006 as other income.

Auditors: Rosenberg Rich Baker Berman & Company, 40 years in business.

BALANCE SHEET:
The assets of the company are mainly PP&E, AR, and inventory. The current ratio is 1.5. A bit less than half equity.

INCOME STATEMENT:
Revenues are down somewhat. Gross margins are about 55%. Operating expenses eat up the rest. Net loss, although they seem to hover around breakeven.

EQUITY:
Not much dilution in the past 2 years.

CASH FLOWS:
Cash flow from operations is ugly and capex is about the same or greater than depreciation for the last two years. Not to mention the extra cash paid for patents and trademarks. Net borrowing for two years.
Very low cash paid for income taxes.

NOTES:
Big R&D costs (over 12% of revenues).

Big 10-year mortgage, 6.52% fixed. The land has appreciated somewhat, but not enough to jump and and down about. Last year they got a 2nd mortgage on the property (raised $2 million), 6.38% fixed.

Financial ratios failed a covenant, got a waiver.
Revolver: ($750K, secured by AR and inventories, LIBOR + 2.25).

Some NOLs.

With shares selling right now at 70 cents, the fully diluted market cap is around $3.5 million, which is about 1/2 revenues.

Looking at prior financial statements, here are their earnings over time:
2006: ($779K)
2005: $269K
2004: $231K
2003: $134K
2002: $186K
2001: $397K
2000: $130K
1999: $317K
1998: $376K

Roughly guessing, I'd say it looks like around $200K per year to me, and maybe it doesn't stand up well over time to inflation? I'd say a market cap of about $3 million is all that it's worth. But you never know if they strike pay dirt in the future, which would make it worth the $3.5 million market cap it currently has.

CONCLUSION:
Too much of a mousetrap. Stop following

Looking at my investment decisions vs actual stock prices starting from the first posts on this blog. These early ones were mostly junky stuff. Later on, I filtered most of that out before posting here.

B-Fast (BFTC) overall outlook: somewhat negative
Result: neutral
Grade: good

BakBone Software (BKBO) overall outlook: started out neutral, but then I ended up investing in it.
Result: neutral
Grade: bad so far

Lift-a-loft overall outlook: none

Live World (LVWD) overall outlook: started out very positive, became an investment, then bailed out.
Result: investing was somewhat of a wrong decision but not terrible by any means, bailing out was correct. Stock price has gone up somewhat.
Grade: fair

Lincoln Logs (LCLG) overall outlook: bad
Result: stock price change unknown, but they're still losing money
Grade: correct

Ballistic Recovery Systems (BRSI) overall outlook: somewhat negative, then negative
Result: stock is way down.
Grade: correct

Ballston Spa National Bank (BSPA) overall outlook: overpriced by a factor of 2.
Result: stock is up somewhat. FDIC #6959. Net income is actually down somewhat for Q2 vs prior year $473K vs $485K (FDIC database) on somewhat higher assets. They're still somewhat over capitalized.
Grade: fair

Bank of Salem [Oregon] (BSOG): I said they were worth about $11.30 per share (stock price was $17), but worth watching since they had good ROA, ROE and other factors from the FDIC database.
Results: stock is unchanged.
Grade: fair

Bank of the James (BOJF): This seemed like a good investment and I owned shares for a while (till I found other stuff I liked better). I figured it was worth about $22 solid, and selling for $17.
Result: stock price went up to $22 and has then fallen back somewhat.
Grade: good

Bay National Corporation (was BANI, now BAYN): I said it was selling for about what it was worth.
Result: stock went up to $23 from around $17.
Grade: fair

UPDATE Oct 15, 2006:
This proves why I need to keep notes. I forgot that I had already gone back and looked at these companies not long ago here. D'oh!

Spot price of uranium up another 25 cents to $56.00.

BakBone Software was named Storage Partner of the Year by Sun Microsystems at Sum Forum 2006, but it wasn't a joint announcement.

ETLT shareholder meeting is Thursday (Oct 12). No known shareholders going. These things are almost always worthless except for Berkshire and a few others. ETLT stock has been going up, it reached 55 cents today. 4x volume. Is management talking to someone?

Searched for stock of Allen Organ (previously AORGB). Looked at it here, delisted. Nothing on the website or anywhere else obvious. International installations. D'oh! Still own some NICK, great! Jones Soda, too flavory for drinking any quantity? [I tried an experiment drinking even a small amount on a regular basis but just gave up and switched to IBC Root Beer, which rocks. Both brands tend to be cleaned out of the store whenever I go in. Buffett made a comment about Coca Cola not leaving an aftertaste vs most other soft drinks. I first looked at JSDA here.]

International Barrier Technology building materials (IBTGF, sec). Last looked at them here, was at 81 cents, currently under 60 cents. 10-K: around 30 million shares (2.2 million options + 1.9 million warrants). BC Canada. Volume shipped is increasing every quarter. Operating and net income stinks. Low margins. Seems capital intensive. Good balance sheet. 12% officer/director ownership. It's still one of those "who knows" stocks. Go back to sleep....

UPDATE next day:
This guy seems to own 5% of ETLT, which is surprisingly easy to do, given the small market cap of the company (it only takes about $600K).

UPDATE 10/14/06:
I tried another Jones Soda today, "Fufu Berry Soda". I just think Jones Soda has it all wrong. This is all my opinion and I don't know anything about the soft drink business, but it seems like you either want to make something that's like Coca Cola, which you drink all the time or else you make something like, well, like brandy: something to savor, with complex aromas, rather than to wash down a hamburger.

Back in the 1980s, I read a book called Weather at Sea. Those familiar with Charlie Munger of Berkshire Hathaway (Warren Buffett's children say that Charlie is the smartest person they've ever met, which says good things about both Charlie and Warren Buffett) would recognize this as one of those "mental models" that Munger is always talking about. The whole point of mental models is that by studying the current theoretical and practical knowledge about real-world complex systems, you can gain a certain understanding of many principles of how complex things works.

Some complex systems are things like global weather, a large suspension bridge, a silicon chip microprocessor (the actual electrical characteristics), a large corporate organization, an ordinary animal like a housecat, or the stock market. The point of these things is that none of them are truly "solved" and completely understood. There are regions of operation where our understanding, our "model" of these things is able to predict their behavior very closely. But every complex system has third order, fourth order, and higher effects that may have negligable impact on the system in most conditions. They may be totally hidden and unknown until the system gets into some rare state where they may unexpectedly cause our model of the system to diverge greatly from what the actual system will do.

A famous example of this was the Tacoma Narrows Bridge which collapsed in 1940. Before that time, bridge engineers were far less concerned about (and perhaps less knowledgable about) underdamped resonance characteristics [combined with aerodynamics] in structures than they have been since. Today, the field of control theory within engineering has done a great deal of work to understand and model resonance in complex systems, thanks to a huge number of brilliant, hard-working, and results-oriented people. It's not surprising that this model of resonance carries over into all complex systems: that's usually the case. When you develop an accurate model for some aspect of a system, it will typically apply to other systems.

In theory, there's no difference between theory and practice, but in practice there is.

Weather at Sea is an intense tutorial about the physics of weather for people who need to be able to be their own meteorologists while travelling a great deal across oceans. While there are a lot of interesting models in the book, one that I've found very useful is the stability or instability of a local air mass.

If you were to take a block of air from, say, 5,000 feet above sea level and then move it up slightly higher in altitude, because of the lower air pressure at that slightly higher altitude and because of the model of PV=nRT, the block of air will be slightly colder. But the interesting question is What is the temperature of the surrounding air at that higher altitude? If the surrounding air at that higher altitude is actually colder than the slightly cooled block of air, then because it will have a lower density (again due to PV=nRT), the warmer block of air will be pushed up to a higher altitude. And once again, if the surrounding air at that even higher altitude is colder than the rising block of air, the block of air will continue rising. And adding to this effect is the fact that, at a lower pressure and temperature, water from within the block of air may condense into water droplets which will cause the block of air to heat up, which causes it to rise even faster.

This situation is why we see puffy clouds so often in certain atmospheric conditions. It's actually an instability within the air. Some small perturbation causes a small amount of air to rise slightly, causing it to be warmer than the surrounding air, causing it to rise even more, etc. Eventually water condenses out causing it to rise even faster. When the unstable temperature gradient extends through a large vertical section of the air, then you get very tall clouds. And then lots of other effects kick in, such as electrical charges building up as the rising air passes through falling rain and hailstones.

The basic principle of instability is that it exists when a small push against some part of the system in one direction causes it to move in that direction and that the conditions are such that the more it moves in that direction, the more force it experiences in that same direction.

Logically, you might think that this would continue indefinitely, but all real-world systems are finite. And because they're finite, eventually some other factor will kick-in to override the instability. In the weather example, the air is only so tall. Also, there are factors that kick in above around 50,000 feet that will make it difficult to maintain an instability. The rising air column will flatten out horizontally forming the classic anvil shape of thunderclouds. In all real-world systems, the farther away from the normal equalibrium you get, the more you'll bump into other factors that will become more important than the instability. Complex systems in the real world are stable overall because, if they weren't, they wouldn't exist. They would be very temporary.

In early 2000, at the peak of the Great Bull Market, I was reading the Motley Fool book, Rule Breakers, Rule Makers. The book had been out for about a year in hardcover and was very popular. The final rule for identifying a "Rule Breaker" stock was this:

Finally, given this confluence of positive factors, you must find documented proof that it is grossly overvalued, according to the financial media.

Think about that for a minute. The final proof that a stock is a good investment is that people with experience are saying that it's overvalued. If just a small portion of the investment dollars are moving by this principle, then the system would not be changed by it. But when a large percentage of the investment dollars are applying this principle, then you clearly have created an instability in the stock market system. The more a stock goes up into overvalued prices, the more it's considered a good invesment and the most the price will continue going up. While this one book did not create the stock market bubble, the same kind of thinking that inspired the book did.

In the case of the stock market bubble, it continued until the overriding factors reached a certain point and then fear took hold. The fear in this recent bubble wasn't as bad as the fear during the 1930s because the people running the economy were a lot more knowledgable about avoiding Great Depressions and because investors are a lot more knowledgable about stocks, businesses, and markets today than in the 1930s. This is what experience is all about. Ignorant idealism not founded on lots of experience with, and accurate models of, the complex system of the economy and markets, on the other hand, causes a great deal of economic stupidity.

In the past week, the Dow Jones Industrial Average reached an all-time high point three times in a row. The NASDAQ composite (which was a better representation of the glamourous stocks), would need to more than double to do the same. And when you look at the Dow chart, the bigger picture it portrays is one of a long, continuous increase in the overall wealth, interrupted by the stupidity of the 1930s, the 1970s, and the more recent period from 1995 to 2003: localized instabilities within an overall stable system.

Yet another contract for CVU (combined links).

...awarded a $4.4 million contract to provide Sikorsky Aircraft ("Sikorsky") with Hover Infra Red Reduction System (HIRRS) module assemblies for use as spares on the UH-60 BLACK HAWK helicopter. This contract covers Sikorsky's anticipated spares requirements through 2007. There are two HIRRS assemblies used on each helicopter, and there are more than 1,000 UH-60 BLACK HAWK helicopters currently using this HIRRS configuration.

When you add that onto this and this and this and this, it seems that things are picking up for CVU (finally!).

With this award, year-to-date contract awards total $21.1 million, which is 27% more than new contract awards for all of 2005.

UPDATE Oct 5, 2006:
I just want to clarify that I'm not associated with Pink Sheets® LLC. They're a very old (1904) information services company that, in my opinion, is currently doing a lot of really great things lately. They're working hard to improve the quality and value of what they provide to issuers (i.e. public companies), broker/dealers, and investors.

This is getting insane. The spot price of U3O8 (yellowcake) is up another $1.75 to $55.75. Here's the 2 year chart. Here's a chart from Cameco. While the price is higher than it's ever been in nominal dollars, when adjusting for inflation, it was well over $100 back in the late 1970s. The US got the jitters after that and stopped building new nuclear power plants. Then in the 1990s, the Cold War ended and a lot of nukes were downblended to produce reactor food.

The technology has slowly improved in safety and there are a lot of benefits that weren't recognized in the past (the lack of greenhouse gases), not to mention that places like China and India have a huge need for more power and are suffering from horrible pollution which the emerging middle classes won't tolerate much longer.

In the news, possible new nuclear power plant in Texas. Russia building nuclear plants in China, "Russian specialists will be able to meet the previously agreed date for the handover of the first power unit of the Tianwan NPP by November 2006." The US DoE is awarding $8 million in grants for engineering studies on nuclear plants.

In the rough valuation estimate for Strathmore Minerals that I did on June 24, 2006, I estimated that at a uranium price of $45 per pound, Strathmore would be worth something along the lines of US$4.20 (which would need to be discounted for time, offset somewhat by various wildcard extras) and that every dollar increase in the price would add about 21 cents to that number. At $55.75, that adds about $2.25 to the number, bringing it to US$6.45 (note that the main Strathmore stock, STM.V, is in Canadian dollars as opposed to the Pink Sheets STHJF which is in US dollars). And that's assuming they give up half of the operating profits in some sort of joint venture operation. I haven't accounted for taxes, but the number is very rough with a lot of pessimism [appropriately] baked into it.

The spot price is not the same as the contract price (which is how most uranium is sold), but last I heard, the spot price was typically below the various contract prices lately.

All of this would be speculation if not for the large supply/demand imbalance (which I posted about here and here and more stuff in the combined links area) and the difficulty in correcting that imbalance over any reasonable period of time. My guess (and it's a guess: even the great Warren Buffett was wrong about at least how long it would take for the silver market supply/demand imbalance to play out), my guess is that when the dust settles, all the noise about gold and oil will end up being overblown while uranium quietly becomes an increasingly important comodity.

Dragon Pharma (DRUG, sec) 51 cents. Long slow decline. Q2 results: Big jump in assets held for sale and payables, lots of liabilities are now current. Distress? Revenues way up, so is G&A. Operating profit, but net loss.
stop following


Smith-Midland Corp (SMID, sec) stock tanked on Aug 14 after Q2 announced results

The decreased net income was primarily the result of the unusual profitability of barrier and security work in 2005 related to the Presidential Inauguration. In comparing the Company's regularly occurring production and sales volumes, Slenderwall(TM) production and sales increased significantly during 2006, resulting from growing customer acceptance and continued success in expanding the applications and capabilities of Slenderwall(TM). These increased revenues were offset by increased fuel costs, raw material costs, and direct labor, which also contributed to the decreased net income.

Q2 results: Period ending June 30, 2006.
4.6 million shares on Aug 11, 2006. 562K options.
AR is up, inventories are up. Cash is down. Lots of debt (8.25% interest), not much equity.
Revenues are up to $6.4 million from $5.3 million in Q2 over prior year (but prior year was unusually bad. Gross margins are down to 16% from 22%.

Cost of goods sold as a percentage of total revenue increased from 78% for the three months ended June 30, 2005 to 84% for the three months ended June 30, 2006. The majority of the increase was due to extra labor costs and materials related to complex forming of elaborate architectural detail related to one large project in production during the second quarter. Raw materials also increased mostly due to fuel surcharges from vendors combined with the increased freight in costs related to getting the materials to the plant. Also, included in cost of goods sold were shipping and installation expenses of $1,262,892 for the three months ended June 30, 2006 and $991,390 for the same period in 2005, an increase of $271,502, or 27%. The increase related mostly to overall increased shipping and installation activity, plus increased fuel costs associated with operating Company trucks combined with various add-ons and change orders from installation activity related to Slenderwall™ architectural projects.

That's not the sign of a good business to be in.

SG&A is up. Operating loss of ($158K) vs $92K profit. 6 month profit, but not much. Cash flow from operations is weak due to AR and inventories. About $300K capex for this year and last (6 months). Some finance activity.

This seems like a brutal business.
stop following


Sono-Tek Corp (SOTK, sec) This was the liquid atomizing nozzle sprayer business. Stock price hasn't really gone anywhere over the past year, now at around $1.40. There was this statement at the Aug 18, 2006 shareholder meeting.

...continued efforts aimed at developing both new geographical markets and new technology and application based markets.... revenue growth of over 18% and net income growth of over 31% in Fiscal Year 2006.... newer applications involving fuel cells, solar cells, nanocoatings, diabetes monitor coatings, and the development of a new line of nozzles based on advanced materials technology.... continued development of strategic partnerships in India and China aimed at increasing both our market presence in these key countries....

They expect revenue growth of around 5% over last year. Net income is not predictable due to timing issues of large orders. Opening an office in China and a Chinese language website. Seems a bit like Epolin.

Q1 results:
period ending May 31, 2006. 14.4 million shares on June 16, 2006. 122K options.
$690K net cash.
Revenues down slightly. 46% gross margins (down from 48%) due to field service cost increases. Increases in marketing, R&D, G&A. Operating income way down. No tax, net income $125K.
Cash flow from ops is weak due to AR and inventories. Very low capex.

Looking back at the 10-K:
Same share count but 942K options???
A patent expires Dec 2007. They applied for a patent for a new design for the entire line of nozzle systems.
Mild customer concentration (6.4% and 6%).
Foreign revenues were 44% vs 41%.
37 employees.
The market is fairly cyclical in the electronics industry. They've been expanding into the medical area.

We have sold a significant number of specialized ultrasonic nozzles and MediCoat stent coating systems to large medical device customers. Sono-Tek's stent coating systems are superior compared to pressure nozzles in their ability to uniformly coat the very small arterial stents without creating webs or gaps in the coatings. We sell a bench-top, fully outfitted stent coating system to a wide range of customers that are manufacturing stents and/or applying coatings to be used in developmental trials.

AR was up 17% due to increased sales (of 18%). Inventory up 14%. Stock options have been large in the past (2.3 million warrants, 671K options in 2004, much less in 2005).
Gross margins down to 50% (from 54%) due to lower margins in overseas sales which increased by 27%.
A former employee misappropriated $250K via unauthorized check writing over 3 years. Recovered $158K.
The directors are mostly in their 60s, Chairman is 86.
Executives seem strong: Chief technologist got a PhD from Rensselaer Polytechnic. CEO has good experience at GE. CFO good. Max salary is $160K plus $85K bonus. Executives and directors own 21.77% of the stock.
Warrants issued for loans. Mezzanine financing [ugh] back in 2001.
Sherb & Co. auditors.
$1 million net income but with no taxes.
Cash flow from ops somewhat weak due to AR and inventories, even worse in prior year. Low capex.
Rough guess: if the business is as good as it looks, maybe the stock is worth 75 cents, maybe more, but maybe not the current price of $1.40.
continue following

Flamemaster (website, old sec) "a specialty chemicals manufacturer servicing the aerospace and defense industries with high performance aircraft sealants and coatings." I last looked at them here.

These guys declared their 67th consecutive quarterly dividend: 1.7 cents, which is a 50% reduction "to preserve cash for relocation to a larger facility located in Pacoima CA. The Company hopes to complete the relocation sometime in the next quarter."

They reported Q3 results back in July. Both 3 month and 9 month revenues were up. 9 month earnings were 38 cents. However, they went dark last year and their reporting is extremely sparse, not to mention I don't see any auditing of their results. Their net margin for last year was around 12%. This last quarter net margin was down to around 8.4%.

They don't report enough information for me to continue following the company.

stop following